Hybrids losing appeal as gas engines get more efficient

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While slow sales are a concern, hybrids will still be an important part of every automaker’s strategy. The Toyota Prius plug-in hybrid was on display at the North American International Auto Show yesterday in Detroit.

By David Welch and Jeff GreenBloomberg News
January 11, 2012

DETROIT - It’s a sign of the times: Cadillac is staking its comeback on a compact car that boasts fuel economy approaching 40 miles per gallon.

Its ATS sedan is one example of how carmakers at the Detroit auto show are putting new emphasis on small, powerful models with more fuel-efficient engines as sport utility vehicles and even hybrids take a back seat.

General Motors Co.’s luxury brand brags that the ATS will run on a turbocharged four-cylinder engine that kicks out 270 horsepower but offers robust fuel economy.

Ford said it is dropping plans for a hybrid version of its popular Escape SUV.

While past shows have been stocked with gas-electric hybrids and SUVs, slow hybrid sales have brought a dose of reality to the industry. Carmakers realize they can give buyers what they want and avoid the expense of electric motors and batteries by shrinking cars and wringing better fuel economy from traditional gasoline engines.

“The advantages of hybrids are getting harder to justify,’’ said Scott Corwin, a vice president with consulting firm Booz & Co. “It’s the cost differential. Consumers are rational and they understand the cost of ownership.’’

Hybrid sales slowed last year to 2.2 percent of US auto sales, from 2.4 percent in 2010, according to LMC Automotive.

‘The advantages of hybrids are getting harder to justify. It’s the cost differential.’

The challenge is that gasoline engines have become more efficient and the cost of hybrids has not come down fast enough for many buyers, said David Champion, at the magazine Consumer Reports.

He pointed to Honda’s Civic, which gets 32 miles per gallon in combined city and highway mileage, and the Civic hybrid, which gets 44 miles per gallon. The hybrid version of the car saves a consumer $322 in fuel a year, according to the Environmental Protection Agency. Given the added sticker price, it would take more than six years to get the money back on a similarly equipped car at today’s fuel prices.

Mike Jackson, chief executive of AutoNation Inc., said 75 percent of customers in showrooms want to talk about hybrids. But only 2.5 percent of AutoNation sales are hybrids.

After 10 years of hybrids in the US market and oil near $100 a barrel, consumers still aren’t ready to pay the premium for hybrid models, said Reid Bigland, president of Chrysler’s Dodge brand. Bigland on Monday introduced the Dodge Dart, which won’t have a hybrid version.

Hybrids will still be an important part of every automaker’s strategy, though. Ford showed off two new hybrid versions of its Fusion family sedan at the auto show, yet said it would cancel plans for a hybrid version of the Escape. Toyota’s new Prius C, meanwhile, costs just $19,000 and gets 50 miles per gallon.

The biggest opportunity for fuel efficiency remains with the gasoline engine, not electric cars or hybrids, for the next decade, said Xavier Mosquet, a senior partner at Boston Consulting Group in Detroit who was an adviser to the US bailout of GM and Chrysler.

The battery in an electric car still adds $10,000 to the price and it will be difficult to reduce that soon, he said.

Sergio Marchionne, chief executive of Fiat SpA and Chrysler Group LLC, said skepticism over electric cars and plug-in hybrids “is well justified.’’ But “if anyone thinks they will meet future EPA rules solely with internal combustion engines, they are smoking an illegal substance,’’ he said.